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OBJECTIVES
CHAPTER 6
CORPORATE GOVERNANCE AND
OTHER STAKEHOLDERS
CHAPTER OUTLINE
Introduction
Corporate Governance and Employees
Corporate Governance and Customers
Corporate Governance and Institutional Investors
Corporate Governance and Creditors
Corporate Governance and the Community
Corporate Governance and the Government
(1) CORPORATE GOVERNANCED EMLPOYEES
Employees are also one of the stakeholders of
the organisation; by increasing their participation
in the organisation, one could ensure corporate
governance.
If long-term shareholder value is the chief purpose
and objective of a corporate entity, it is not the
be-all and end-all of its existence. It is now
ubiquitously agreed that there are other claimants
as well that crave for its attention and equitable
distribution of its profits. Employees, customers,
creditors, institutional investors, government and
the community at large are the other stakeholders
that vie with the stockholders for a pie of its time
and resources.
Introduction
It is fallacious to argue anymore that the
immediate concern of a Company is to be
exclusively directed towards the shareholders,
while other stakeholders are only of a peripheral
importance to it.
Wealth Creation Requires Capital
and Labour
Today, the growing recognition that human capital is a
source of competitive advantage has led to the
understanding that labour is more important than
capital, if not, is at least as important as capital.
Corporate leaders in developed countries increasingly
understand that people and the knowledge they create
are often the most valuable assets in a corporation.
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The interests of employees can be Trade Unions

protected through
Trade Unions Trade Unions could represent the collective
Co-determination: employee representation on interests of the employees and fight for what is
boards of directors rightly due to them from the organization.
Profit-sharing
Equity-sharing
"Team production" solution

Co-determination Profit-sharing

It is a situation where there is employee Most profit-sharing plans are broad-based

representation on the board of directors of the i.e. all or most employees were included in
organization. the scheme of profit sharing rather than
just executives only.

Profit sharing could be done in many

ways such as
The objective of such profit sharing is to
Cash-based sharing of annual profits where encourage employee involvement in the
the annual cash profits of the organization are organization and improve their motivation and
shared among the employees. distribution of wealth among all the factors of
production.
Deferred profit sharing where the deferred
profits of the organization are shared among
the employees.

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Equity-sharing

Under equity-sharing, the employee is given an There are various ways in which equity sharing
option to buy the shares, identify themselves with, could be done: (i) Employee share ownership
and thus become the owners of the organization. plans (ii) Stock bonus plans (iii) Stock option plans
(iv) Employee buyout, and (v) Worker cooperatives.

Team Production Solution 1. Voluntary Participation :

There should be voluntary participation on the part
of the employees and they should not be forced to
Team production solution is a situation where the do anything out of compulsion.
boards of directors must balance competing interests
of the various stakeholders and then arrive at 2. Extend Benefits to all Employees :
decisions that are in the best interest of the
organization. The benefits should be extended to all employees,
factory workers, clerical staff and the executives of
the organization indiscriminately.
There are some guidelines that could be used here
while deciding on employee representation in the
organization.

3. Clarity and Transparency : 5. Regularity :

The process by which the allocation of shares is There should be some regularity when such offers
done should be clear and transparent, and not too are made, they cannot be made as and when the
complicated. organisation feels like making such offers.

4. Predefined Formula : 6. Avoiding Unreasonable Risk for Employees :

There should be a predetermined formula to work The organisation should take into consideration the
out the number of shares that could be offered, interests of the employees when they make any
and it should not be left to the discretion of any decisions, and they should see to it that there is no
party. undue risk taken.

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7. Clear Distinction :
There should be a clear distinction between the
participation schemes that are offered to the
employees and the regular wages and the benefits that
are offered by the organisation.
8. Compatibility with Worker Mobility :
The participation schemes offered should be
compatible with the worker mobility. The worker should
not be penalised by accepting the schemes offered to
him.
Customers Information Needs
The Advocacy Group, dealing with customer
information needs, stresses the need for
corporates to disclose actions brought by
customers and regulatory authorities regarding
products, services and market practices.
The information needs of customers
include:
Content, additives and treatments of food and
medicines, sufficient to allow reasonably-informed
consumers to make rational market decisions and to
protect themselves and their families - appropriate
descriptions may include pesticides used in fruits and
vegetables, hormones and chemicals used in growing
and processing meat, and substances in cosmetics and
personal grooming products to which some consumers
may be allergic; and
"Well hidden characteristics" or those product qualities
which, regardless of expense or purchase frequency,
remain hidden even after use -- such as the amount of
toxic chemicals and nicotine in cigarettes.
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(2) CUSTOMERS AND
CORPORATE GOVERNANCE
Dow Chemicals vision statement says: "To be
successful, we have to provide a balance to the needs
of all four of these groups (customers, employees,
shareholders and society). If we maximise the return
to any one or two of these stakeholder groups at the
expense of the others, we won't survive very long."
The information needs of customers
include:
Risks of injury from normal usage;
Noise, odours and other nuisances or problems
associated with use;
Design for recycling;
Biodegradability of products and packaging;
Unusual life cycle costs, including repairs, energy
consumption and disposal that will be borne by parties
other than the producer or seller;
Warnings, with appropriate detail, regarding unusual
contamination and adulteration exposure and risks
during production, shipping, marketing and storage;
(3) CORPORATE GOVERNANCE AND
INSTITUTIONAL INVESTORS
Types of Institutional Investors In India
The development oriented financial institutions, such as
IFCI,ICICI, IDBI, the State Financial Corporations, etc
form the first category.
The second category covers all the insurance companies
such as the Life Insurance Corporation of India (LIC),
General Insurance Corporation (GIC), and their
subsidiaries.
The third category includes all the banks.
Finally, in the last category, all mutual funds (MFs),
including UTI, are included.
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(4) CORPORATE GOVERNANCE
AND CREDITORS
Without dependable debt collection, no amount of
supervision or competition can make banks run
efficiently.
External financing for private firms comes essentially
from two sources: debt and equity. While control by
equity holders is appropriate in profitable times (when
entrepreneurial risk taking is needed), creditor
monitoring and control become binding in times of
financial distress, particularly when tight controls on
spending and investment are needed.
Its human resource principles - respect and dignity for all
Its dedication to accurate and transparent accounting and
financial standards
Its concern for the environment, for good business ethics and
conduct, for social advancement
Its over-riding passion to serve customers
Its insistence on fair treatment of suppliers - and competitors
Its uncompromising standard to comply with government laws
and regulations in all countries in which it operates
Its desire to work with others to lead society to a better
economic standard and quality of life.
Some argue that governments will tend to use
regulations instead of the threat of legal
sanctions when the legal system does not
effectively dissuade managers from taking
socially costly actions.
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(5) CORPORATE GOVERNANCE AND
THE COMMUNITY
That is the role of governance. Corporate governance
is the mechanism by which the values, principles,
management policies and procedures of a corporation
are made manifest in the real world.
The fundamental basis of corporate governance and
responsibility is the value system of the corporation:
(6) CORPORATE GOVERNANCE AND
THE GOVERNMENT
Political economy forces that produce the laws,
enforcement mechanisms, bankruptcy processes,
and the ability of powerful managers to influence
legislation will profoundly shape corporate
governance.
Thus the government in every country exercises a
certain amount of control over operations of the
organisation and the government could use this to
steer the organisation towards the path of good
corporate governance.